There is one common misconception in paid advertising, when the cost per impression (cost to deliver an ad impression) increases, your performance & profitability will decrease.
If you think about it, it makes sense. If you’re paying more money for the same ad space, then how can your results stay the same or get better? It will increase your cost to reach users, the cost to get the users to your website, and the cost to get a conversion and obviously will negatively impact your return on investment.
So why is this mostly incorrect?
First, let’s define CPM.
CPM is a common metric used in the online advertising industry to measure and price the effectiveness & delivery of ads.
How It’s Calculated
Facebook defines it quite clearly. CPM measures the total amount spent on an ad campaign, divided by impressions, multiplied by 1,000. (Example: If you spent $50 and got 10,000 impressions, your CPM was $5.)
Now that we understand what CPM is, let’s talk about how it’s used and regulated. Advertising on most major advertising platforms is done based on a simple bidding system. An online action, that is opened to all available advertisers on the specific advertising platform. Imagine a virtual game, where millions of advertisers compete for the same users (ad space) and a system (algorithm) takes their bids based on many factors and decides who wins based on the advertiser’s bid and ad quality or relevance. It sounds a little complex but it’s quite simple. If Advertiser A and Advertiser B want to reach the same user, they will both dictate how much they are willing to pay, and based on the highest bid and ad quality or relevance, the winner will win that ad space. That’s how the CPM is dictated. The cost per 1000 impressions on average, will be dictated based on the amount advertisers tell the advertising platform how much they are willing to pay for that space when the highest bidder wins.
It used to be more simple. When advertising was mostly focused through direct search and keyword-based bidding, advertising platforms like Google could easily create bidding around a specific keyword and location and advertisers would know exactly who their ads are delivered to and at what specific search terms. Then, advertisers could simply bid based on keywords and tell the advertising platform how much they want per click (CPC). The cost per click would be based on the CPM cost ( cost for 1000 impressions). For some businesses it worked great, while others were pushed out of the game. When advertising becomes focused on specific search terms or keywords, competition becomes more aggressive, and depending on the industry the cost to advertise will skyrocket. That’s why specific keywords like Mortgage or Attorney can average at $50 PER CLICK! And can get as high up as hundreds of dollars or more.
This started to change when advertising platforms like Facebook rapidly emerged and changed the way that we advertise today. The idea was simple. People are not searching for products or services on Facebook, so advertising based on search terms or keywords is not even an option. Instead, we can optimize based on your advertising goals. Instead of telling the platform which keyword you want to target, tell it what specific objective you want to achieve (getting a lead, a sale, or another form of conversion) and it will find the most relevant users who are likely to complete that action. How exactly? Once they start seeing who interacts and converts from your ads or even who converts on your website, they will find similar people based on online behavior and user characteristics. In other words, moving your targeting to autopilot. This leads us to the next point, automatic algorithmic advertising.
The revolution of discovery platforms like Facebook then followed by Youtube, changed the way we advertise and opened up doors for so many new advertisers. If initially you had to bid on specific keywords and reach a potential customer in the most expensive way (since it was your only way), now you could reach them at different stages which means that you could reach relevant users for a much lower cost. If I am running a Covid testing lab business, then I can do what everyone is doing and just target on Google search anyone who is looking for a covid test and pay ridiculous costs since I will be competing with my direct competitors, or alternatively, I can reach the same users after they search or during possible times that they might be “in the market” for a covid test for a much lower cost since I won’t be necessarily competing directly with my competitors, I will be competing with other advertisers who are wanting to reach the same user in efforts to sale him a different product. And that’s the core of automatic advertising. The advertising platform decides who is most relevant and can regulate the cost per impression based on different markets or different users.
Should you be concerned about a high cost per impression?
Now that we covered the brief history of it, let’s talk business. The average cost per impression on advertising platforms means nothing. The range of advertising on any advertising platform is so great that using averages or looking at how much other advertisers are paying per impression will mean nothing to your business. You can be advertising to users in India and paying less than a dollar for 1000 impressions and you could be paying $100 for 1000 impressions for reaching users in the US. It all depends on who your potential customers are and how many advertisers want to reach the same users. If your potential customers are online shoppers with a high intent to purchase high ticket products, you can be sure that the cost to reach them will be high.
Increased CPM often leads to better targeting & higher click-through rates.
One thing that you will often notice is that as your campaigns are spending more money and gathering more data, the cost per 1000 impressions will increase. This happens because your targeting is becoming more accurate and more fine-tuned towards the users who are most likely to complete the action that you are looking to achieve (lead, purchase, or other conversions). Low-quality users are weeded out and advertising becomes more focused towards the highest quality of users available for the lowest cost possible. As your CPM increases, you will also notice that in most cases your click through rate (ratio of people who click to your website after seeing the ad) increases as well. This means that if there is a direct correlation between the CPM and the CTR (click through rate), you’re going to be paying the same amount exactly for each user that lands on your website.
It’s simple math, if you are paying $5 for 1000 ad impressions and are getting 5% of people clicking through to your website, that’s 50 visitors for $5, which is 10 cents per visitor. If you are paying $10 for 1000 impressions and are getting 10% of people clicking through to your website, that’s 100 people for $10, which means again 10 cents per visitor. So just because your cost per impression increases, it doesn’t mean that you’re paying more for advertising.
Additionally, the higher the quality of users, the higher the conversion rate on your website. When you weed out the low-quality users, you’re bringing in more relevant users which generally leads to a higher conversion rate on your website.
High-quality ads get better auctions and lower CPMs, low-quality ads pay more.
It’s important to understand that advertising platforms’ ultimate goal is to generate as much revenue that they possibly can from advertisers; however, they understand that if the quality of ads or business that advertise is low, it will create a negative user experience which can result in fewer ads being clicked on the platform in the future. That’s why along with the bids or budgets advertisers select, they are also evaluated for ad quality that determines many factors including how relevant the ad is to users and their level of engagement with it (hiding the ad, reporting it, or bouncing right back to the platform after clicking). Being disabled and kicked off from the platform for creating a negative user experience or violating the ad policy is a widely known issue to advertisers and happens on most advertising platforms. However, you can be penalized for low-quality ads while still being allowed to advertise. The result of the penalty will be paying a higher price for every 1000 impressions than other advertisers who are competing for the same ad space with better quality ads. It’s not that they are charging you more for specific ad impressions, they are just letting other advertisers with more high-quality ads win cheaper and better opportunities even though you might be willing to pay more. Think of it as having many different auctions that you can place bids on, but because your ads are marked as low-quality, you are restricted from bidding on the most attractive ones. If you’re running ads that run through policy issues (such as rejected ads, ad accounts, etc.), then you will notice that in many cases the cost you’re paying for 1000 impressions (to reach users) is really high. When you start with a very high cost per impression, it’s really hard to run effective ads unless you’re converting a big percentage of users and your funnel/online website is extremely effective. In many cases, advertisers that pay a very high CPM will need to make changes to their ads and website to create a better user experience that will increase their advertising performance.
High CPM can push specific businesses out of paid advertising.
Regardless of whether your advertising on direct search platforms like Google or discovery platforms like Facebook, paid advertising is a Jungle, only the strongest survive. A perfect example would be low-ticket products or businesses that work with very small margins that can’t afford to pay the heavy toll of advertising online. It has nothing to do with whether you’re an advertising expert or what methods you use, it has to do with the nature of your business or product. Take for example someone like me, who wants to simply sell a book about marketing. I want to make the price as affordable as possible so I can reach as many readers as I possibly can, that being said, I am competing directly with other businesses who are also targeting people who might be interested in marketing and target them with more expensive offers or services, thus they can pay a lot more to reach them. I want to sell them a book for $15, they might be selling a ticket offer that is worth thousands of dollars, and we both want to reach the same audience. So yes, this might not be the perfect example, because you could argue that books should be advertised on websites like Amazon or Barnes and Noble where people are actually searching for reading material. Another argument that you can make is that I shouldn’t be relying on selling the book only, I should add upsells or courses to increase the average order value to be able to pay and cope with the high cost to advertise, but what if I just wanted to sell the book? It would be extremely challenging. I would have to have extremely high converting ads plus an extremely high conversion rate on my website to maybe break even or make a little profit. There are other endless examples of other low ticket offers which face the same struggle and can’t find a way to incorporate paid advertising into their marketing strategy. Like in every jungle, only the strongest will survive.
So what can you still do about it?
Yes, it wasn’t the most optimistic blog post, but it’s important to put things in the correct light. The cost to advertise could be high because of the market you are in, or because of the ads that you are running. Nevertheless, there are some things that you can do to improve your ads.
- Focus on your highest-converting products. If you are selling more than one product or a wide variety of products, identify the products that have the best conversion rate. Meaning, Identify the products or services in your business that are most popular and convert better than the others. These products will require fewer clicks and impressions to generate a conversion or sale, thus will have a lower cost per acquisition and a better return on investment. Use tools like Google Analytics or other third-party analytics tools to identify.
- Expand your GEO markets. Many of the businesses that I work with that feel like they saturated their market and don’t always think about expanding their reach globally to find better and more cost-effective ad spaces. The US is the most expensive market to advertise online compared to its global size and there are other English or non-English speaking countries where the cost to advertise is much lower. This opens up your business to a fresh audience that might never have heard about your business before, but also to more ad space opportunities for a lower cost than parallel markets
- Improve the quality of your ads. Platforms like Facebook and Google offer insights about the level of engagement and user feedback of your ads. Use that information to understand how users respond to your ads and take steps to constantly improve your ads to create a better user experience. Don’t spam and use the same ads over and over again and monitor the comments closely to see what people really think of your ads.
- Improve the user journey. The user journey is not just from the point that they get to your website until they make a purchase, it starts in that first ad impression that a user sees until he makes a conversion. Break down the steps that users take from the first impression to a conversion and constantly work towards improving them, every little improvement you make will make your entire marketing more effective and more profitable.
CPM, otherwise known as Cost Per 1,000 Impressions, can vary greatly depending on your market, audience, and even the quality of your ads. Many advertisers incorrectly assume that a higher CPM cost is directly proportional to a lower return on investment. This simply isn’t true. In fact, if you have high-quality ads and a well-targeted audience, a higher CPM cost actually translates to more impressions.
Similarly, low-quality ads may result in a higher CPM cost and fewer impressions. Low-quality ads that don’t translate to impressions when compared to other ads in the same market result in less revenue for companies like Youtube and Facebook. In turn, they may choose to make it more expensive for you to advertise to prevent your ads from effectively wasting ad space.
But beware, a high CPM cost can drive companies with low-ticket products out of the paid marketing space entirely. Recognize that if your product has small profit margins, then that maintaining a high-cost marketing campaign may not be in your best interest. You can have incredibly attractive ads and a great product but still realize a low return on investment if you are operating on a small profit margin.
Here are some tips and tricks to optimize your CPM cost: focus your ad campaigns on your highest-converting products, expand your GEO market, improve the overall quality of your ads, and optimize the user experience.